40% of employees in my department are in their late 20’s to 30’s, the “house buying age” as we once called them. These are professionals whom earn the upper middle class income. They also enjoy stable employment and yet most of them still rent or living with their parents. Recently, one colleague learnt that I brought three houses in the last 12 years. They were flabbergasted (their words, not mine) and then they wanted to know how I did it. I brought the three houses at three different stages in my life. Buying my first home in my early 20’s was the toughest with the “peanuts” paid of my first job post-graduation, but I learn a lot from my first try in home-ownership and I hope you will find my experience useful.
Taming the down payment saving “beast”- the first hurdle of home-ownership
My advice to the first time home buyers with a tight budget and have less than 10% down payment is to be practical and realistic about what you can afford. Don’t go over your budget unless you have rich and generous parents whom willing to bail you out. Saving for down payment is a big challenge for a lot of people because cost of living is high and you may want to enjoy life not just live to save.
Here lies the first hurdle of down payment saving: how can you save while still somewhat enjoy few things in life that make you happy? Few things come to mind: 1) have a rich spouse 2) wealthy and generous parents 3) inheritance from very nice relatives or 4) win lottery. Like most of you, I didn’t have any of those when I brought my first house. Darn! life would be much easier but alas… My only option was to save smartly. By the end of the third years, I saved and set aside $15,000 for down payment plus $4,000 for closing cost of my first home. How did I do it? Before you ask, I didn’t just eat rice and lived like a hermit. No way! I like myself too much. So, I tackled down payment with the same approach that I always did, made lists!!
Here are 7 steps I took:
- Set a savings goal. I gave myself a $20,000 savings target ($15,000 for down payment; $4000 for closing cost and $1,000 for moving cost and other expenses). Here is the second advice: save for your closing cost. Don’t borrow it from your credit card or line of credit especially when you don’t have savings to fall back on if you lose your income for whatever reason.
- Set a timeline and work toward it.
- Created a visual reminder. I wrote down the exact target date on a piece of paper and tapped it on the wall next to my bed. Nothing fancy! But it helped me to stay focus on my goal.
- Created a personal budget worksheet and be HONEST about it. Definitely take the time and do the math so you know exactly how much money to save each week and what spending you will need to cut to meet your saving target. Then, I compared my actual savings to the target savings every week to make sure I was on the right saving track.
- Willing to make some trade-off. From my budget, I knew that I had to live with my mom and sister to cut down on expenses and save. If you want to save money quickly, then seriously consider sharing accommodation with family or friends temporary. You will save a lot and quite quickly. I couldn’t save $20,000 in 3 years with my “peanuts” paid if I hadn’t live with my mom and my sister.
- Determined the “must have” and “nice to have”.For example: I “must” have dinner night out with friend twice a month and I budgeted $30 each meal. This was 12 years ago, so $30 per meal was ok, now it will be $200. Darn inflation! “Nice to have” would be: give up Caribbean vacation for 3 years well…I found alternative to cheer me up.
- Set up an automatic withdraw from my chequing account and directly deposited it into my RRSP/401K. For Canadians, RRSP is a great savings vehicle for first time home buyer because you will get a bit of tax break. For non-Canadians, a saving account would do. The idea is automatically transferred the savings to designated savings account so I could train myself to live without that money. Basically, I let the bank automatically took away some of my spending power and increased my “saving” power because I had little self-control when it came to impulse spending. I needed the bank to keep me honest. The personal finance experts called this: the “pay yourself” concept. It is just a fancy way to label the saving approach.
Savings is not as hard as you may think. You just need to find way to balance your need. For example, I had impulse purchase issue, but I found a way to cheat. Think of Weight Watcher with their calories counting method, controlling impulse purchase is very similar.
Watching my spending
Once, I had a night out with friends (1 of my “must have” in life) and the meal budget was $30. We had a great time that night and ended up order a second bottle of Chianti. Having another glass of Chianti with friends would push my meal budget to $40. I went for it but the very next day, I reviewed my budget and committed myself to cut something else from following week spending by $10 to make up for this shortfall. You may say, come on! Budget hawk maniac! It is $10 for god sake, are you nut? Do you have to be that’s insane? The answer is: YES, YES and YES. I had to. It is not the $10, but it is a discipline that I must instill for myself.
If I felt of budget wagon once and not “discipline” myself for the action, I would likely commit another “budget crime” ok…so I may be more neurotic than most people but I firmly believe that discipline was one of key driver helping me saved in such short time.
In short, I fed my inner “impulse spending beast” sometime, so I won’t go complete nut but I took immediate actions to get back on the saving track so I didn’t fell off the saving wagon. By the end of the third year, I reached my savings target of $20,000, and then I moved to the next hurdle: finding and buying my first home.